The Business of Law /Edward PollCan You Sell Your Law Practice?

Edward Poll is a Los Angeles law practice management consultant who advises attorneys and law firms on ways to improve the operations of their offices. He is the author of Attorney & Law Firm Guide to the Business of Law: Planning & Operating for Survival & Growth (ABA General Practice Section (1994)). If you have suggestions for, or comments about, this column, call 800/837-5880 or send e-mail to "LawBizPoll@aol.com".

More and more attorneys are getting out of the practice of law, seeking less stressful careers or retirement. Most leave the law abruptly--they empty their offices and lock the doors, which is unfortunate. In leaving that way, they miss an opportunity to cash in on a valuable asset.

You probably have spent years building your practice. Instead of packing it into boxes, wouldn't you prefer to sell it? And what about your spouse? If you were to die suddenly, wouldn't you prefer that he or she be able to sell it?

The answer for lawyers in ten states is, yes. Alaska, California, Florida, Hawaii, Michigan, Missouri, New Jersey, Oregon, and Wisconsin (and the U.S. Virgin Islands) all have approved provisions that permit the sale of a law practice. And many other states are considering similar proposals.

California was the first state to adopt a rule of professional conduct (Rule 2-300 adopted in 1989) that specifically permits the sale of a law practice. The American Bar Association, through the efforts of the General Practice Section, followed with a similar rule, Model Rule 1.17. The latest state to adopt such a provision is Oregon.

What About Your Practice?Most law practices--including small and personal ones--are saleable for the right price and under the right terms: The seller is able to assure the buyer that he or she is receiving a law practice with a certain volume of revenue or a certain client base that will remain with the buying attorney for a designated period of time. One way to assure both seller and buyer that purchase payments will be made for designated revenues received is to create an earn-out or pay-out program. Such a program would give the selling attorney an incentive to help the buying attorney keep the clients with the practice.

Of course, there are some practices that will not be salable. For example, a practice could be run in such a personal way that, no matter how competent, the buying attorney would not be able to keep the clients without the continuing involvement of the selling attorney.

Who Is Buying?Lawyers are in the market for existing law practices for a number of reasons. Some are disenchanted veterans of large firms who decide they would prefer practicing on their own. They view sole practice as a way to retrieve the personal touch that is missing from their client contacts.

Another reason lawyers leave large firms is that many firms have become unstable. They have slowed or stopped recruiting new lawyers and have, in many cases, already terminated the attorneys who did not bring in a lot of new business. Given that sort of work environment, many attorneys would rather go out on their own than stick around and wonder when the ax is going to fall.

Another group of potential buyers is recent law school graduates. For all but the top 10 percent of law school graduates, jobs are difficult to find. After spending three years or more in law school, and many thousands of dollars, most new lawyers are not willing to find another career. They are determined to hang out that shingle no matter what.

Regardless of the specific reason, it is clear that many lawyers have recognized the wisdom of doing what has been common in other professions for years: buying an existing practice.

Business professionals know that it is almost always easier to buy an existing business than to start a business "from scratch." An existing business has a history of sales or revenue that can be counted on as a base; customers tend to repurchase products and services they like. Further, the buyer of an existing business has the advantage of full knowledge of the cost of operations. He or she may be able to see a way right up front that savings can be implemented by doing things a little differently. The same advantages apply to the purchase and sale of a law practice.

Ethical ConsiderationsThe sale of a law practice raises a number of ethical questions, including the following:

Can an attorney break off and sell or buy only a portion of a practice? It depends on the rules of the specific jurisdiction. For example, a rural sole practitioner in Oregon, who has a general practice and also has developed a subspecialty in pensions and profit-sharing, wants to retire and sell the practice. It may be impossible for this solo to find a single buyer who is willing to come into a small community and practice general law and who also is competent to handle the technical pension and profit-sharing work. In Oregon, the two portions of the practice can be split and sold separately. Note that not every state would agree.

Does client confidentiality prevent discussion about specific clients or their matters? How can a potential buyer know the nature of the practice without some disclosures? This apparent dilemma has been resolved by several jurisdictions with a ruling that the would-be buyer is bound by the same requirements of confidentiality that bind the would-be seller.

Is the sale of a law practice equivalent to a referral for a fee? (Such referrals are not allowed by many jurisdictions.) In those areas where law practice sales have been approved, any rules barring "shilling" have been amended to say that this restriction does not apply to situations involving a lawyer's selling a practice to someone, and then recommending to clients that they work with the new lawyer (who is competent to meet their needs).

Does a buying attorney's existing errors and omissions insurance policy cover new cases acquired from the selling attorney? Currently, no errors and omissions policies restrict case coverage based on the source of the case or client.

Is the selling attorney covered for allegations of negligence made after the transfer of the cases and files? Normally, insurance policies are purchased annually and are based on circumstances at that time. Changes of circumstances after that point do not affect the coverage or premium until the next anniversary date when the new premium is determined. Therefore, the selling attorney who has errors and omissions professional liability--or malpractice--insurance coverage retains that coverage until the next annual premium is due.

At that time, the selling attorney must decide whether to (a) keep the existing policy and renew it, (b) decline to renew the policy and "go bare," or (c) purchase a "tail" policy that will cover all future claims for all previous alleged negligence.

In small communities, the possibility of conflicts of interest is substantial. How can this risk be reduced when considering a law practice purchase? It is important that a "conflicts check" be made by the buying attorney to verify that there will be no conflicts as a result of taking on the new matters. If a conflict is found, that matter should not be transferred to the buying attorney unless a waiver can be obtained from the client involved. Assuming the price and other terms of the transaction have been negotiated to the satisfaction of both parties, the conflicts check usually is the last step before the actual transfer.

The bottom line is that the buying and selling of a law practice must hold paramount the interests and the protection of the existing clients. When a practice is sold, clients have a right to the continuity of their matters, and the appropriate transfer of their files to a competent attorney. The rules of professional conduct must be followed.

The practice of law is an honorable profession that is also a business. The effort you have spent building a successful practice over the years does have value, value that can be transferred to the benefit of all concerned.